With less than a week to go until the US presidential election, financial markets are anticipating a potential Trump victory.
The term "Trump Trade" has gained popularity among investors as his proposed policies – including those on tariffs, immigration, aid to Ukraine, and cryptocurrency regulation – have influenced trends across all asset classes. This trend has seen the US dollar, gold, silver, and Bitcoin strengthen, while stock markets feel the pressure.
However, markets may be responding more to uncertainty and risk hedging than to any concrete Trump policy implementation.
Regardless of who wins, the policies of the next president will be instrumental in shaping market trends. Even if Harris wins, a reversal in market direction may be limited, given the prevailing economic forces driving sentiment.
Euro could extend weakness regardless of election outcome
The global market outlook has been heavily influenced by the upcoming US presidential election on 5 November, with betting markets leaning towards a Trump victory.
Economists believe Trump's proposed 60% tariff on Chinese goods, along with a 10% tariff on imports from other countries, could drive up US prices, compelling the Federal Reserve to raise interest rates, thereby adding pressure on equities and other currencies.
Additionally, a renewed EU-US trade conflict could trigger a fresh round of currency adjustments, potentially prompting the European Central Bank to accelerate rate cuts, which would be likely to further weaken the euro.
Some analysts have cautioned that a Trump re-election could drive the euro towards parity with the US dollar.
Dilin Wu, Research Strategist at Pepperstone Australia, noted: "Given Germany's already precarious position, this could exacerbate the situation, potentially deepening contraction and/or accelerating ECB rate normalisation."
However, the Trump Trade may not be the sole factor behind the dollar's recent strength.
Kyle Rodda, Senior Financial Markets Analyst at Capital.com, remarked: "We're observing a drop in the EUR/USD, which, though primarily due to continued US economic outperformance relative to the eurozone, may also reflect the impact of the Trump Trade, beyond just increased deficit spending."
The euro began losing ground against the US dollar at the start of October after the US reported job figures well above expectations, reducing the likelihood of further aggressive rate cuts by the Federal Reserve. The US third-quarter GDP growth of 2.8% on an annualised basis further supported a "soft-landing" scenario for the economy.
In either scenario, a Trump win would be likely to see the euro fall sharply against the US dollar, while a Harris win might prompt a short-term euro rebound, though the long-term trend would likely continue to be driven by broader economic forces.
Sectors likely to be affected based on election outcome
A Trump victory would undoubtedly introduce more uncertainties for European economies, given his stances on climate change, "America First" policies, and trade tariffs.
Trump could revoke exemptions on European steel and aluminium tariffs, adversely affecting mining and industrial sectors. The "Trump Tariff" could particularly impact European car manufacturers, which are already grappling with economic challenges in export-reliant nations such as Germany.
However, a Harris win may not offer substantial relief either, as she would likely extend Biden’s Inflation Reduction Act (IRA), which carries protectionist undertones. The IRA includes hundreds of billions in climate and energy policy spending, with tax credits for US electric vehicle makers potentially disadvantaging their European competitors.
Despite these challenges, sectors like oil and gas could benefit under a Trump administration, as he would likely ease emissions regulations, creating favourable conditions for fossil fuel producers such as Shell and BP.
"Trump is supportive of fossil fuels and less so for renewables," noted Rodda from Capital.com.
However, higher US oil production could further pressure global energy prices, potentially squeezing profit margins for oil producers. Rodda added: "It will be intriguing to see if Trump achieves his 'drill, baby, drill' ambition and what that implies for US energy output and global prices."
Lastly, banking stocks could benefit from Trump's deregulation policies. Higher inflation could lead to rising interest rates, thereby boosting banks' net interest income.
However, a Harris victory might not bring significant change for the financial sector, as she would be likely to maintain existing regulatory frameworks.